U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2002
Commission file number 333-47986
TELKONET, INC.
(Name of Small Business Issuer in Its Charter)
Utah 87-0627421
(State of Incorporation) (IRS Employer Identification No.)
902 A Commerce Road Annapolis, Maryland 21401
(Address of Principal Executive Offices)
(410) 897-5900
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 16,596,181 shares of Common Stock
($.001 par value) as of August 15, 2002.
Transitional small business disclosure format: Yes No x
--- ---
TELKONET, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Losses:
Three Months Ended June 30, 2002 and 2001
Six Months Ended June 30, 2002 and 2001 November 3, 1999 (Date
of Inception) through June 30, 2002
Condensed Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2002 and 2001
November 3, 1999 (Date of Inception) through June 30, 2002
Consolidated Statement of Deficiency in Stockholders' Equity
November 3, 1999 (Date of Inception) through June 30, 2002
Notes to Condensed Consolidated Financial Information:
June 30, 2002
Item 2. Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Item 1. Financial Statements (Unaudited)
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2002 2001
------------ ------------
Unaudited
CURRENT ASSETS:
Cash and equivalents $ 142,001 $ 21,885
Prepaid and deposit 4,625 4,625
------------ ------------
Total current assets 146,626 26,510
PROPERTY AND EQUIPMENT:
Furniture, equipment, and leasehold improvements, at cost 74,449 54,950
Less: Accumulated depreciation 37,052 28,108
------------ ------------
37,397 26,842
OTHER ASSETS
Financing costs, less amortization costs of $471,542 and
$415,742 at June 30, 2002 and December 31 ,2001 628,525 684,325
------------ ------------
$ 812,548 $ 737,677
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 314,585 $ 116,741
Notes payable 566,500 400,000
Due to shareholders 7,500 7,500
------------ ------------
Total current liabilities 888,585 524,241
Convertible debentures 1,655,407 940,000
COMMITMENTS AND CONTINGENCIES -- --
DEFICIENCY IN STOCKHOLDER'S EQUITY
Common stock, par value $.001 per share; 100,000,000
hares authorized; 15,271,711 issued at June 30, 2002 and
2,115,371 issued at December 31, 2001 15,272 22,115
Common stock subscription (1,000,000) --
Additional paid-in-capital 3,466,421 2,221,154
Deficiency accumulated during development stage (4,213,137) (2,969,833)
------------ ------------
Deficiency in stockholder's equity (1,731,444) (726,564)
------------ ------------
$ 812,548 $ 737,677
============ ============
See accompanying notes to the unaudited condensed consolidated
financial information
3
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
For the period
from November
3, 1999 (date
of inception)
Three Months ended June 30, Six Months ended June 30, through June
2002 2001 2002 2001 30, 2002
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research & Development $ 30,760 $ 109,024 $ 151,431 $ 156,815 $ 430,546
Selling, General and Administrative 625,380 230,365 1,009,913 421,490 3,203,172
Depreciation and Amortization 32,372 7,882 64,744 15,727 130,381
------------- ------------- ------------- ------------- -------------
Total Operating Expense 688,512 347,271 1,226,088 594,032 3,764,099
Loss from Operations (688,512) (347,271) (1,226,088) (594,032) (3,764,099)
Interest Income (Expense) (4,171) (10,426) (17,216) (15,710) (449,038)
Provision for Income Tax -- -- -- -- --
------------- ------------- ------------- ------------- -------------
(4,171) (10,426) (17,216) (15,710) (449,038)
Net income $ (692,683) $ (357,697) $ (1,243,304) $ (609,742) $ (4,213,137)
============= ============= ============= ============= =============
Loss per common share (basic and
assuming dilution) $ (0.05) $ (0.02) $ (0.07) $ (0.03) $ (0.27)
============= ============= ============= ============= =============
Weighted average common shares outstanding 14,154,678 21,859,149 17,244,540 21,837,260 15,834,524
See accompanying notes to the unaudited condensed consolidated financial information
4
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO JUNE 30, 2002
Additional
Paid-in
Common Shares Stock Amount Capital
------------- ------------- -------------
Net Loss $ -- $ -- $ --
------------- ------------- -------------
Balance at December 31, 1999 -- -- --
Shares issued to founders January 2000, in exchange for
services and costs valued at $ 0.60 per share 19,300 193 11,387
Shares issued in June 2000, for cash in connection with
private placement at $375 per share, net of costs 1,735 17 644,219
Shares issued in July 2000, for warrants exercised at a price
of $375 per share 190 -- 71,250
Shares issued in August 2000, in connection with the merger of
Comstock Coal and Telkonet Communications, Inc 21,775,335 21,775 --
August 2000, retirement of Telkonet Communications, Inc shares (21,225) (210) --
Shares issued in October 2000, in exchange for warrants
exercised at a price of $1 per share 29,145 29 29,115
Shares issued in October 2000, in exchange for warrants
exercised at a price of $ 0.40 per share 10,891 11 4,345
Net loss -- -- --
------------- ------------- -------------
Balance at December 31, 2000 21,815,371 21,815 760,316
============= ============= =============
Shares issued in June 2001, for cash in connection with a
private placement, shares issued at $.50 a share, net of costs 260,000 260 129,740
1,839,378 warrants issued in June 2001, valued at $0.13 per
warrant, in exchange for services -- -- 237,036
72,668 stock options issued in June 2001, valued at $ 0.09 per
stock option, in exchange for services -- -- 6,375
245,287 warrants issued in July 2001, valued at $0.08 per
warrant, in exchange for services -- -- 18,568
36,917 stock options issued in July 2001, valued at $ 0.08 per
warrant, in exchange for services -- -- 2,795
Shares issued in August 2001, for cash in connection with a
private placement, shares issued at $.50 a share, net of costs 40,000 40 19,960
241,000 warrants issued in August 2001, valued at $ 0.39 per
warrant in exchange for financing costs -- -- 94,687
114,000 warrants issued in August 2001, valued at $ 0.43 per
warrant, in exchange for interest -- -- 49,020
150,000 warrants issued in August 2001, valued at $ 0.16 per
warrant, in exchange for services -- -- 23,340
36,917 stock options issued in August 2001, valued at $ 0.06
per stock option, in exchange for services -- -- 2,422
818,000 warrants issued in September 2001, valued at $ 0.14
per warrant, in exchange for financing costs -- -- 112,230
(CONTINUED)
Deficit
Accumulated
During
Common Stock Development
Subscription Stage Total
------------- ------------- -------------
Net Loss $ -- $ (33,973) $ (33,973)
------------- ------------- -------------
Balance at December 31, 1999 -- (33,973) (33,973)
Shares issued to founders January 2000, in exchange for
services and costs valued at $ 0.60 per share -- -- 11,580
Shares issued in June 2000, for cash in connection with
private placement at $375 per share, net of costs -- -- 644,236
Shares issued in July 2000, for warrants exercised at a price
of $375 per share -- -- 71,250
Shares issued in August 2000, in connection with the merger of
Comstock Coal and Telkonet Communications, Inc -- -- 21,775
August 2000, retirement of Telkonet Communications, Inc shares -- -- (210)
Shares issued in October 2000, in exchange for warrants
exercised at a price of $1 per share -- -- 29,144
Shares issued in October 2000, in exchange for warrants
exercised at a price of $ 0.40 per share -- -- 4,356
Net loss -- (929,720) (929,720)
------------- ------------- -------------
Balance at December 31, 2000 -- (963,693) (181,562)
============= ============= =============
Shares issued in June 2001, for cash in connection with a
private placement, shares issued at $.50 a share, net of costs -- -- 130,000
1,839,378 warrants issued in June 2001, valued at $0.13 per
warrant, in exchange for services -- -- 237,036
72,668 stock options issued in June 2001, valued at $ 0.09 per
stock option, in exchange for services -- -- 6,375
245,287 warrants issued in July 2001, valued at $0.08 per
warrant, in exchange for services -- -- 18,568
36,917 stock options issued in July 2001, valued at $ 0.08 per
warrant, in exchange for services -- -- 2,795
Shares issued in August 2001, for cash in connection with a
private placement, shares issued at $.50 a share, net of costs -- -- 20,000
241,000 warrants issued in August 2001, valued at $ 0.39 per
warrant in exchange for financing costs -- -- 94,687
114,000 warrants issued in August 2001, valued at $ 0.43 per
warrant, in exchange for interest -- -- 49,020
150,000 warrants issued in August 2001, valued at $ 0.16 per
warrant, in exchange for services -- -- 23,340
36,917 stock options issued in August 2001, valued at $ 0.06
per stock option, in exchange for services -- -- 2,422
818,000 warrants issued in September 2001, valued at $ 0.14
per warrant, in exchange for financing costs -- -- 112,230
5
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO JUNE 30, 2002
(CONTINUED)
Additional
Paid-in
Common Shares Stock Amount Capital
------------- ------------- -------------
1,636,000 warrants issued in September 2001, valued at $ 0.40
per warrant, in exchange for interest -- -- 654,400
25,000 warrants issued in September 2001, valued at $0.30 per
warrant in exchange for services -- -- 7,380
60,000 warrants issued in October 2001, valued at $ 0.16 per
warrant, in exchange for financing costs -- -- 9,720
120,000 warrants issued in October 2001, valued at $ 0.44 per
warrant, in exchange for interest -- -- 52,800
95,000 warrants issued in October 2001, valued at $ 0.21 per
warrant, in exchange for services -- -- 19,558
5,000 warrants issued in November 2001, valued at $ 0.16 per
warrant, in exchange for financing costs -- -- 810
10,000 warrants issued in November 2001, valued at $ 0.44 per
warrant, in exchange for interest -- -- 4,400
25,000 warrants issued in November 2001, valued at $ 0.33 per
warrant, in exchange for services -- -- 8,218
25,000 warrants issued in December 2001, valued at $ 0.30 per
warrant, in exchange for services -- -- 7,380
Net loss -- -- --
------------- ------------- -------------
Balance at December 31, 2001 22,115,371 22,115 2,221,155
============= ============= =============
Shares issued in February 2002, in exchange for convertible
debentures at $ .50 per share 43,586 44 21,749
Shares issued in March 2002, to a founder in exchange for
shares canceled (Note B) 5,250,000 5,250 (5,250)
Shares canceled in March 2002 due to capital restructure (Note B) (13,480,961) (13,481) 13,481
Shares issued in June 2002, for warrants exercised at $1.00
per share for services rendered 47,906 48 47,858
Shares issued in June 2002, for warrants exercised at $.40 per
share for services rendered 26,443 26 10,551
Shares issued in June 2002 to founders, for options exercised
at $1.00 per share (Note B and C) 1,000,000 1,000 999,000
Shares issued in June 2002, for warrants exercised at $1.0025
per share, for services rendered 80,039 80 80,159
Shares issued in June 2002, for warrants exercised at $ .402,
in connection with original private placement 189,327 189 77,720
Common stock subscription (Note C) -- -- --
Net Loss -- -- --
------------- ------------- -------------
Balance at June 30, 2002 15,271,711 $ 15,272 $ 3,466,423
============= ============= =============
(CONTINUED)
Deficit
Accumulated
During
Common Stock Development
Subscription Stage Total
------------- ------------- -------------
1,636,000 warrants issued in September 2001, valued at $ 0.40
per warrant, in exchange for interest -- -- 654,400
25,000 warrants issued in September 2001, valued at $0.30 per
warrant in exchange for services -- -- 7,380
60,000 warrants issued in October 2001, valued at $ 0.16 per
warrant, in exchange for financing costs -- -- 9,720
120,000 warrants issued in October 2001, valued at $ 0.44 per
warrant, in exchange for interest -- -- 52,800
95,000 warrants issued in October 2001, valued at $ 0.21 per
warrant, in exchange for services -- -- 19,558
5,000 warrants issued in November 2001, valued at $ 0.16 per
warrant, in exchange for financing costs -- -- 810
10,000 warrants issued in November 2001, valued at $ 0.44 per
warrant, in exchange for interest -- -- 4,400
25,000 warrants issued in November 2001, valued at $ 0.33 per
warrant, in exchange for services -- -- 8,218
25,000 warrants issued in December 2001, valued at $ 0.30 per
warrant, in exchange for services -- -- 7,380
Net loss -- (2,006,140) (2,006,140)
------------- ------------- -------------
Balance at December 31, 2001 -- (2,969,833) (726,563)
============= ============= =============
Shares issued in February 2002, in exchange for convertible
debentures at $ .50 per share -- -- 21,793
Shares issued in March 2002, to a founder in exchange for
shares canceled (Note B) -- -- --
Shares canceled in March 2002 due to capital restructure (Note B) -- -- --
Shares issued in June 2002, for warrants exercised at $1.00
per share for services rendered -- -- 47,906
Shares issued in June 2002, for warrants exercised at $.40 per
share for services rendered -- -- 10,577
Shares issued in June 2002 to founders, for options exercised
at $1.00 per share (Note B and C) -- -- 1,000,000
Shares issued in June 2002, for warrants exercised at $1.0025
per share, for services rendered -- -- 80,239
Shares issued in June 2002, for warrants exercised at $ .402,
in connection with original private placement -- -- 77,907
Common stock subscription (Note C) (1,000,000) -- (1,000,000)
Net Loss -- (1,243,304) (1,243,304)
------------- ------------- -------------
Balance at June 30, 2002 $ (1,000,000) $ (4,213,137) $ (1,731,444)
============= ============= =============
See accompanying notes to the unaudited condensed consolidated financial information
6
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
--------------------------- For the period
from November
3, 1999 (date
of inception)
through June
2002 2001 30, 2002
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from development stage operations $(1,243,304) $ (609,742) $(4,213,137)
Adjustments to reconcile net loss from development stage
operations to cash used for operating activities
Warrants issued in exchange for financing and interest -- -- 378,213
Warrants issued in exchange for services -- -- 333,072
Common stock issued in exchange for services rendered 138,722 -- 150,302
Depreciation and amortization 64,744 15,727 130,381
Increase (decrease) in:
Deposits -- -- (4,625)
Accounts payable and accrued expenses, net 197,844 73,693 314,585
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (841,994) (520,322) (2,911,209)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net of disposals (19,499) (4,629) (74,449)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (19,499) (4,629) (74,449)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of costs 99,702 130,000 898,252
Proceeds from (repayments of) stockholder advances -- (2,500) 7,500
Proceeds from issuance of convertible debentures 715,407 -- 1,655,407
Proceeds from loans 166,500 400,000 566,500
------------ ------------ ------------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 981,609 527,500 3,127,659
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS 120,116 2,549 142,001
Cash and cash equivalents at the beginning of the period 21,885 10,450 --
Cash and cash equivalents at the end of the period $ 142,001 $ 12,999 $ 142,001
------------ ------------ ------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 17,216 $ -- $ 24,965
Income taxes paid -- -- --
Issuance of warrants for financing and interest -- -- 1,278,983
Issuance of warrants and options for services -- -- 333,072
Common stock issued for services 138,722 -- 150,302
Acquisition:
Assets Acquired -- -- 1
Accumulated Deficit -- -- 2,643
Liabilities Assumed -- -- (2,642)
------------ ------------ ------------
$ -- $ -- $ 1
------------ ------------ ------------
See accompanying notes to the unaudited condensed consolidated financial information
7
TELKONET, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2002
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
---------------------------------------
General
-------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB, and therefore, do not
include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results from developmental stage operations for the six-month period ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002. The unaudited consolidated financial
statements should be read in conjunction with the consolidated December 31, 2001
financial statements and footnotes thereto included in the Company's SEC Form
10-KSB dated February 14, 2002.
Basis of Presentation
---------------------
Telkonet Communications, Inc., a wholly-owned subsidiary of Telkonet, Inc.,
formerly Comstock Coal Company, Inc., was formed on November 3, 1999 under the
laws of the state of Utah. Telkonet Communications, Inc. is a development stage
enterprise, as defined by Statement of Financial Accounting Standards No. 7
("SFAS No. 7") and is seeking to develop, produce and market proprietary
equipment enabling the transmission of voice and data over electric utility
lines. From its inception through the date of these financial statements the
Telkonet Communications, Inc. has recognized no revenues and has incurred
significant operating expenses. The consolidated financial statements include
the accounts of the Company, and its wholly owned subsidiary, Telkonet
Communications, Inc. Significant inter-company transactions have been eliminated
in consolidation.
Reclassification
----------------
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
NOTE B - CAPITAL RESTRUCTURE
In January 2002, the Company re-organized its capital structure, whereby the
Company agreed to purchase 8,936,244 shares of the Company's common stock held
by the Founders and cancel certain vested options held by the Founders to
purchase the Company's common stock, in exchange for the issuance of newly
issued options to purchase 3,500,000 of the Company's common stock. The new
stock options expire in January 2012, and have an exercise price of $1.00 per
share.
PRIOR RETURNED ADJUSTED RETURNED VESTED
FOUNDERS SHARES SHARES SHARES OPTIONS OPTIONS
Dave Grimes 4,971,918 3,721,918 1,250,000 160,000 1,000,000
Peter Larson 1,455,285 705,285 750,000 200,000 1,000,000
Don Erat 2,861,348 2,361,348 500,000 - 500,000
Steve Sadle 5,647,695 2,147,695 3,500,000 200,000 1,000,000
---------- ---------- ---------- -------- ----------
14,936,246 8,936,246 5,500,000 560,000 3,500,000
In connection with this transaction, the Company cancelled 13,480,961 shares of
previously issued common stock.
NOTE C - COMMON STOCK SUBSCRIPTION
In connection with the stock options described in Note B, 1,000,000 shares of
common stock were issued to two of the Company's Founders in June 2002. The
Company also entered into four promissory notes with the Founders to ensure
payments for issued stock, each notes with principle amounts of $250,000. The
8
notes are due one year from date of issuance with all notes being due no later
than June 30, 2003. Interest will begin to accrue at June 30, 2003 on any unpaid
balances at an interest rate of 6%.
Item 2. Management's Plan of Operation
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
Description of the Company
--------------------------
Telkonet is a high technology systems application developer with a primary focus
on high speed Internet distribution over the electrical power lines for the
commercial and the multi-dwelling residential markets. Telkonet believes that
through extensive research and development, it has refined a business model that
will provide marketable Internet services across a wide spectrum of commercial
and business end users.
Telkonet has designed and constructed its third generation of power line
communication products to provide high speed Internet access to office
buildings, hotels, schools, shopping malls, commercial buildings, and
multi-dwelling units. These products provide connectivity over the existing
electrical wiring and do not require the addition of costly wiring, or major
disruption to business activity.
In many situations the Telkonet system can be implemented more quickly and less
expensively than adding dedicated wiring or installing wireless systems.
Telkonet believes that utilizing the power line to deliver Internet and
telephone connectivity for the commercial and the multi-dwelling residential
markets creates a significant and definitive niche market opportunity for
Telkonet. Telkonet's solutions overcome many of the difficulties associated with
power-line communications that historically have prevented the achievement of
high data transmission rates.
Telkonet is now at a point in its business development cycle at which the system
requirements and hardware have been developed, and the Company is ready to bring
to market its suite of PlugFast products for high-speed Internet access.
As Internet access becomes a more critical tool, the demand for higher access
speeds has triggered the growth of broadband solutions, and as these roll out,
the desire for access to these emerging broadband networks provides
opportunities for Telkonet. The built-in dial-up modems that have become a part
of most new PCs are not suitable for higher speed connections. Hardwired network
connections with high construction costs and disruption of the workplace, or
complex wireless networks which have coverage and security issues are the only
solutions available today.
The Telkonet PlugFast family of Internet access products provides a viable and
cost effective alternative to the challenges of hard-wired and wireless local
area networks (LANs). This solution set is comprised of two products, the
PLUGFAST GATEWAY and the PLUGFAST TERMINAL.
The Telkonet PlugFast Gateway and Terminal are aimed at multi-user applications
such as residential apartment complexes, hotels and motels, and a variety of
small and medium sized businesses. High-speed Internet connections are becoming
widely available and providers are anxious to sell these connections to their
new and existing customers. Several companies now specialize in providing T1
access and most telephone companies now offer DSL products.
Providers are also offering connectivity through Microwave networks, 2-way
Satellite, Fiber and Cable connections. However, these products share in the
same problem: getting the access to where the customers want it.
The Telkonet solution interfaces to the backbone of the Internet by taking the
signal from any of these broadband sources and, through the Telkonet PlugFast
Gateway, distributing access to the Internet to the ultimate user over the
existing electrical wiring in the building. With the Telkonet PlugFast Gateway
in place, access is provided by simply plugging the user's Telkonet PlugFast
Terminal into the nearest standard electrical outlet. Any existing electrical
outlet in the structure can provide immediate access to the Internet via a
Telkonet PlugFast Terminal. Moving the location of a PC, server, or printer is
accomplished by simply moving the PlugFast Terminal to another electrical
outlet. No additional wiring is required and changes can be made quickly and
easily.
9
The Telkonet PlugFast Gateway provides the connection to the incoming broadband
signal (DSL, TL, Satellite, Cable Modem) and the Telkonet PlugFast Terminal
connects to a user device. Many PCs, each equipped with one Telkonet PlugFast
Terminal, can communicate amongst themselves and can share a single broadband
resource via the Telkonet PlugFast Gateway.
Telkonet has applied for patents that cover its unique technology, and intends
to utilize recently announced advancements in transmission speeds to build next
generation devices for field tests and marketing demonstrations.
Telkonet will continue to identify, design and develop enhancements to its core
technologies that will provide additional functionality, diversification of
application and desirability for current and future users.
Forward Looking Statements
--------------------------
CERTAIN STATEMENTS INCLUDED HEREIN OR INCORPORATED BY REFERENCE CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). TELKONET DESIRES TO TAKE
ADVANTAGE OF CERTAIN "SAFE HARBOR" PROVISIONS OF THE REFORM ACT AND IS INCLUDING
THIS SPECIAL NOTE TO ENABLE THE COMPANY TO DO SO. FORWARD-LOOKING STATEMENTS
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PART INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS.
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
Telkonet is still a development stage company and is yet to earn revenues from
operations. Telkonet may experience fluctuations in operating results in future
periods due to a variety of factors including, but not limited to, market
acceptance of the Internet and power line communication technologies as a medium
for customers to purchase the Telkonet's products, Telkonet's ability to acquire
and deliver high quality products at a price lower than currently available to
consumers, Telkonet's ability to obtain additional financing in a timely manner
and on terms favorable to the Telkonet, Telkonet's ability to successfully
attract customers at a steady rate and maintain customer satisfaction, Telkonet
promotions, branding and sales programs, the amount and timing of operating
costs and capital expenditures relating to the expansion of the Telkonet's
business, operations and infrastructure and the implementation of marketing
programs, key agreements and strategic alliances, the number of products offered
by the Telkonet, the number of returns experienced by the Telkonet, and general
economic conditions specific to the Internet, power-line communications, and the
communications industry.
Revenues
--------
Telkonet generated no revenues from operations from its inception. Telkonet
believes it will begin earning revenues from operations within the next twelve
months as it transitions from a development stage company to that of an active
growth and acquisition stage company.
Costs and expenses
------------------
>From its inception on November 3, 1999 through June 30, 2002, Telkonet has not
generated any revenues. Telkonet has incurred operating expenses of $3,764,099
during this period. These expenses were associated principally with compensation
to employees, product development costs and professional services. During the
second quarter of 2002, Telkonet transitioned it's focus on bringing their
initial offering of powerline communication products to the commercial and
residential market, expenses increased by 98% over the second quarter of 2001
due to an increase in manpower expense from the further expansion of the core
technical team, initial production costs for the PlugFast powerline products,
and the ramp-up and increase in sales and marketing activities.
10
Liquidity and Capital Resources
-------------------------------
To date the Company has generated no sales revenues, has incurred expenses, and
has sustained losses. As a result of the Telkonet's operating losses from its
inception through June 30, 2002, Telkonet generated a cash flow deficit of
$2,911,209 from operating activities. The Company's current liabilities exceeded
its current assets by $741,959 as of June 30, 2002. For the period from
inception through June 30, 2002, the Company has accumulated losses of
$4,213,137. Consequently, its operations are subject to all risks inherent in
the establishment of a new business enterprise.
While Telkonet has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Telkonet's current and projected cash flow deficits from operations and
development. Telkonet is seeking financing in the form of equity investment in
order to provide the necessary working capital. Telkonet currently has no
commitments for financing. There are no assurances Telkonet will be successful
in raising the funds required.
The Company's independent certified public accountants have stated in their
report included in the Company's December 31, 2001 Form 10-KSB, that the Company
has incurred operating losses in the last two years, and that the Company is
dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
Product Research and Development
--------------------------------
Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for the second quarter of 2002 were $30,760
compared to $109,024 for the second quarter of 2001.
Acquisition or Disposition of Plant and Equipment
-------------------------------------------------
Telkonet does not anticipate the sale of any significant property, plant or
equipment during the next twelve months. Telkonet does not anticipate the
acquisition of any significant property, plant or equipment during the next 12
months, other than computer equipment and peripherals used in the Telkonet's
day-to-day operations.
Number of Employees
-------------------
During the period ended June 30, 2002, the Company had 12 employees. In order
for the Company to attract and retain quality personnel, the Company anticipates
it will continue to offer competitive salaries to current and future employees.
As the Company continues to expand, the Company will incur additional costs for
personnel. This projected increase in personnel is dependent upon the Company
generating revenues and obtaining sources of financing. There are no assurances
the Company will be successful in raising the funds required or generating
revenues sufficient to fund the projected increase in the number of employees.
Trends, Risks and Uncertainties
-------------------------------
Telkonet has sought to identify what it believes to be the most significant
risks to its business, but cannot predict whether or to what extent any of such
risks may be realized nor can there be any assurances that Telkonet has
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision with
respect to the Company's stock. Telkonet's prospects must be evaluated with a
view to the risks encountered by a company in an early stage of development,
particularly in light of the uncertainties relating to the new and evolving
power line modulation and transmission technologies. Telkonet will be incurring
costs to develop, introduce and enhance its products, to establish marketing
relationships, to acquire and develop products that will compliment each other
and to build an administrative organization. To the extent that such expenses
are not subsequently followed by commensurate revenues, Telkonet's business,
results of operations and financial condition will be materially adversely
affected. There can be no assurance that Telkonet will be able to generate
sufficient revenues from the sale of their first product and other product
candidates. Telkonet expects negative cash flow from operations to continue for
the next 6 months as it continues to develop and market its business. Telkonet
will be required to sell additional equity or debt securities. The sale of
additional equity or convertible debt securities will result in additional
dilution to Telkonet's stockholders.
Potential fluctuations in quarterly operating results
-----------------------------------------------------
Telkonet's quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, most of which are outside Telkonet's
control, including: the level of use of the Internet; the demand for high-tech
11
goods; trends in broadband service provisioning, the amount and timing of
capital expenditures and other costs relating to the expansion of the Telkonet's
operations; price competition or pricing changes in the industry; technical
difficulties; general economic conditions, and economic conditions specific to
the Internet and communications industry.
Limited public market, possible volatility of share price
---------------------------------------------------------
Telkonet's common stock is currently quoted on the NASD OTC Bulletin Board under
the ticker symbol TLKO.OB. As of June 30, 2002, there were approximately
15,271,711 shares of common stock outstanding. There can be no assurance that a
trading market will be sustained in the future. Factors such as, but not limited
to, technological innovations, new products, acquisitions or strategic alliances
entered into by Telkonet or its competitors, failure to meet securities
analysts' expectations, government regulatory action, patent or proprietary
rights developments, and market conditions for technology stocks in general
could have a material effect on the volatility of the Telkonet's stock price.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) In June, 2002 the Company issued 138,722 shares of its
restricted common stock in exchange for previously issued warrants with exercise
prices ranging from $.40 to $1.0025 per share to outside consultants in exchange
for legal and consulting services. These issuances were considered exempt by
reason of Section 4(2) of the Securities Act of 1933.
In June 2002, the Company issued 189,327 shares of its restricted common stock
in exchange for previously issued warrants with an exercise price $.402 per
share to accredited investors in exchange for $77,907. These issuances were
considered exempt by reason of Section 4(2) of the Securities Act of 1933.
In June 2002, the Company issued an aggregate of 1,000,000 shares of registered
common stock in exchange for previously issued options with an exercise price of
$1.00 per share to two Company officers in exchange for a $1,000,000 note
receivable. The options were issued pursuant to an employee stock option plan
filed on SEC Form S-8 on April 17, 2002.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. Description
--- -----------
99.1 Certification of J. Gregory Fowler Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
99.2 Certification of Stephen Sadle Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(b) Reports on Form 8-K filed during the three months ended
June 30, 2002.
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Telkonet, Inc.
Registrant
August 19,2002 By: /s/ J. Gregory Fowler
------------------ ----------------------
Date J. Gregory Fowler
President and Chief Executive Officer
13